The key to a financially secure retirement is to start saving early and to leave the money invested without being tempted to draw it out. Aim for as much compound interest as possible and never forget that debt is a killer; as compound interest can also work against you, if you are in debt.
So says Hedley Lamarque, Financial Planner at the Durban office of audit, advisory and tax firm, BDO.
“I am often asked when one should start saving and investing and the answer is as early as possible to maximise the effect of compounding. The longer you save the more you will end up with, due to compounding. This is basically interest on interest or growth on growth. For example, an investment of R1,000 per month, growing at 10% p.a. will achieve (before any taxes) R206,552 after 10 years, R765,697 after 20 years, R2.3 million after 30 years and R6.4 million after 40 years. The fascinating thing is that, although you only invested R480 000 (R1000 x 480 months) over the 40 years, your investment would have grown to R6.4 million, as a result of compounding.”
“The importance of starting to save and invest early cannot be overemphasised,” Lamarque said. “Make the start as early as possible, even if you only begin with R100 a month – and do everything possible not to take this money out. Start now, not next year. If, for practical reasons you can’t start at 20, then start at 25 so that by the age of 40 you will begin to have a nice lump sum. The magical ingredient is time – the more time you have, the more magic happens. Begin small and increase savings over time.”
“Be money-wise from a young age. When faced with a purchasing choice, ask yourself – do I want it or do I need it? Nowadays, young and upwardly- mobile people want that new expensive car now. It is a question of weighing up the benefits of material possessions now as opposed to having a healthy retirement package later.”
Lamarque said that pension funds would provide a regular retirement income, but that most people at retirement found they needed to supplement their pension with other savings. He warned against the temptation of taking a pension pay-out when changing jobs, rather than saving it in a preservation fund.
“If you decide to spend your pension pay out on a luxury item or a holiday, you will lose out significantly on the compounding effect. Don’t be tempted.”
“If you don’t save – you will accumulate less for when you can’t work. People are living longer so it is more difficult to calculate how much will be enough to comfortably see you through your retirement. Not long ago 70 years was the average life span; now people are living beyond 100 years and it won’t be long before it could be 130 years, due to advances in the medical field.”
“A good catalyst for taking that first investment step is to take a good look at older people you may know who are still working way beyond their retirement age or who rely on their children to make ends meet. Take a mental picture, because that could be you if you do not start saving in time.”
According to Lamarque, the main vehicles for investing are equities (including offshore exposure), property, bonds and cash.
“Historically the share market has always outperformed inflation in the medium to long term – over time you should get double-digit growth – and it offers liquidity. Many young investors will not have the knowledge to enter the share market directly, so unit trusts are the next best option as they offer a good spread over a number of shares. They also offer a variety of options. For example, an aggressive, high equity unit trust carries higher risk, but offers higher returns that would suit younger investors who have the luxury of time and can safely navigate a few turbulent years. As you get older you would opt for a more conservative balanced fund.”
“It is also advisable to diversify your portfolio, (asset-wise and geographically) as it is risky to have all your eggs in one basket,” he added.
Lamarque put his money where his mouth is and followed his own advice. “As soon as I started work I began investing 10% of my salary in unit trusts. If you start with your first pay cheque, you don’t miss it. I increased it when I was given a pay rise or promotion, knowing that it was essential to keep pace with inflation.”
Lamarque offers a few helpful tips to accumulate enough cash to start saving:
- Analyse your expenditure regularly. Do a budget and see where you can cut back on unnecessary expenses.
- Continually check for better pricing on your monthly expenses, such as insurance and bank charges – quite often you will find cheaper options.
- Cut back on luxuries such as DSTV or buy a smaller car when you are young so you can take that first step onto the savings ladder. Accept that you have to live according to your means and that this sometimes could involve sacrifice.
- Avoid debt. Obviously you need to balance this with your commitments, such as supporting a family, but always keep your debt as low as possible and get rid of the more expensive debt (for example credit card debt) as quickly as possible.
- Reduce your bond by increasing your monthly repayments or paying additional funds (such as your Christmas bonus) into it as soon as you receive it and only accessing it when required; at the same time trying not to use it all, thereby reducing your interest repayments.
How important is a good financial adviser?
“The advantage of using the services of a good financial adviser is that he or she has the skill to point you in the right direction,” Lamarque said. “They are equipped to perform a financial needs analysis so as to offer comprehensive, well informed advice tailored to an individual’s specific needs.”
“A Certified Financial Planner (CFP) meets stringent qualification, competency and ethical requirements which gives clients peace of mind regarding the technical accuracy of their advice and their integrity. CFPs also need to accumulate continuing professional development points every year to ensure that they keep abreast of new developments in the industry.”
** Lamarque is a Chartered Accountant and a Certified Financial Planner and has a Licentiate Diploma in banking. He has more than 20 years’ experience in commerce, having served a stint as Finance Director of Vodacom (Pty) Ltd, as a director on a number of Vodacom’s boards and as a Vodacom Group (Pty) Ltd pension fund trustee.